First Mover Advantage

Topics: Empiricism, Empirical research, Barriers to entry Pages: 45 (14970 words) Published: March 5, 2011
First-Mover Advantages Marvin B. Lieberman; David B. Montgomery Strategic Management Journal, Vol. 9, Special Issue: Strategy Content Research. (Summer, 1988), pp. 41-58. Stable URL: Strategic Management Journal is currently published by John Wiley & Sons.

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Strategic Management Joun~al,Vol. 9, 41-58 (1988)

MARVIN B. LIEBERMAN and DAVID 0. MONTGOMERY Graduate S c h o o l o f Business, S t a n f o r d University, Stanford, California, U.S.A.

This article surveys the theoretical and enlpiricnl literatiirc~or1 nzechnizisrns that confer advantages and disadvantages on first-nzorper firrtzs. Major concept~ral is.sttes rzre addressed, irnplicurions are also and recornmendrrtions are given for future research. Mrrr~~gerial discussed.

What. exactly, are first-mover advantages? Under what conditions do they arise, and by what specific mechanisms? Do first-movers make above-average profits? And when is it in a firm's interest to pursue first-mover opportunities, as opposed to allowing rivals to make the pioneering investments? In this paper we examine these and other related questions. We categorize mechanisms that confer advantages and disadvantages on firstmover firms, and critically assess the relevant theoretical and empirical literature. The recent burgeoning of theoretical work in industrial economics provides a rich set of models that help make understanding of first-mover advantages more precise. There is also a growing body of empirical literature on order-of-entry effects. Our aim is to begin to provide a more detailed mapping of mechanisms and outcomes, to serve as a guide for future research. We define first-mover advantages in terms of the ability of pioneering firms to earn positive economic profits (i.e. profits in excess of the cost of capital). First-mover advantages arise endogenously within a multi-stage process, as illustrated in Figure 1. In the first stage some asymmetry is generated, enabling one particular firm to gain a head start over rivals. This firstmover opportunity may occur because the firm 0143-2095188/050041-18$09.00 1988 by John Wiley & Sons. Ltd.

possesses some unique resources or foresight, or simply because of luck. Once this asymmetry is generated a variety of mechanisms may enable the firm to exploit its position; these mechanisms enhance the magnitude or durability (or both) of first-mover profits. Our discussion is organized as follows. We first consider theoretical models and empirical evidence on three general categories in which first-mover advantage can be attained: leadership in product and process technology, preemption of assets, and development of buyer switching costs. We then examine potential disadr~atztages of first-mover firms (or conversely, relative advantages enjoyed by late-mover rivals). These include free-rider problems and a tendency toward inertia or sluggish response by...
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